How exactly does a bank guarantee work

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Bank guarantee

Sense of a bank guarantee

In business life it can happen from time to time that new contractual partners do not know or trust each other so well. This uncertainty about the financial conduct of the counterpart or also his ability to fulfill the contract often results in the demand for a bank guarantee.

A bank guarantee is intended to secure contractual obligations of different origins. The bank guarantees that the beneficiary of the bank guarantee will be provided with a certain contractual service (e.g. a delivery of goods, a service and, of course, a cash payment). If this service is not provided, the beneficiary can claim the amount specified in the bank guarantee (or a partial amount - as agreed). The bank will then charge this payment to the customer in question - i.e. the customer must also be creditworthy in order to receive a bank guarantee.

A bank guarantee therefore only represents an abstract claim option that is usually not used, since the underlying business is also running smoothly. It serves as an insurance policy for the beneficiary. The guarantor (= the bank) cannot raise any objections or claims against the underlying transaction. If the conditions of the claim are met, the bank must pay out the guaranteed amount (or a fixed partial amount) specified in the bank guarantee.

Bank guarantee in practice

If someone demands a bank guarantee from you in business life, this is not necessarily unusual (in private life it is more likely): Ask your house bank about the conditions for the urgent guarantee and then consider whether the financial outlay is worth it. Bank guarantees are often required for initial transactions. If these are successful, your business partner may forego them in the future.

Example guarantee for payments

You order a huge amount of electrical goods for your business in China. Since you are completely unknown to the producer (or wholesaler), he asks for a bank guarantee to secure his production costs or, of course, his money claim. This will often happen with initial contact: You don't want to pay in advance (who knows what will be delivered then or whether it will be delivered at all) - and the producer also wants to minimize his risk. A bank guarantee could be a possible solution.

You buy a house (prefabricated house or master builder's house) - regardless of the considerable purchase price, your business partner wants to be sure that they will actually receive the purchase price after the service has been provided. Often there is also a irrevocable payment order which comes very close to the bank guarantee.

Example guarantee for deliveries

You urgently need certain goods for your business, but these have to be produced first. In order to protect yourself financially against a possible delivery failure, a penalty payment is contractually agreed. Since you do not know the creditworthiness of the business partner, you request a bank guarantee from them, which you can claim in the event of non-delivery (or late delivery or incorrect delivery).

Example guarantee for services

As a subcontractor, you create a new EDP concept for an IT company. Since this is dependent on your work (and would have to pay a penalty yourself if the service is not provided or if it is not provided on time), a bank guarantee is required from you. If the service is not provided, the bank guarantee will be used.

Even if it is often considered impolite in business life to provide a bank guarantee - such a protection makes perfect sense in many cases. Because you usually rely more on a bank than on an unknown business partner ...

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